Hong Kong updates regulation on fund domiciliation

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Hong Kong is in the process of updating its regulation on fund domiciliation in advance of a possible mutual recognition agreement with mainland China, says KPMG.

While for the moment most funds registered for distribution in Hong Kong are domiciled in Europe or in the Cayman Islands, this could very well change soon. Indeed, Hong Kong has asked mainland China for a mutual recognition agreement of funds domiciled in both jurisdictions, a request that seems to be favourably received in Beijing. This would mean that funds domiciled in Hong Kong could be distributed in mainland China and vice versa.

“This is an extraordinary opportunity for Hong Kong to establish itself not only as a fund distribution but also a fund domiciliation centre. Obviously, if the agreement materialises, global asset managers will want to create Hong Kong domiciled funds to access Chinese customers,” says Tom Brown, KPMG global leader for investment management who visited both jurisdictions last week and held talks with asset managers, trade bodies and regulators.

“If structured in the right way, the same funds could then also be marketed in Europe to institutional investors via AIFMD,” adds Charles Muller, member of the global KPMG leadership team. “But for this to happen, Hong Kong will need to update its regulation on fund domiciliation, a process that has already started.”

The talks on mutual recognition come at a time when the Chinese Government has announced new freedoms for asset managers, including the possibility to outsource certain functions. Chinese asset managers have already started their international expansion, creating subsidiaries in Hong Kong and UCITS funds in Europe.